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Why Did This Chinese Stock Rally as Its Peers Crumbled?

2018 has been a brutal year for many Chinese stocks, which have beeb pummeled by escalating trade tensions and rising interest rates. Shares of Baidu, Alibaba, and Tencent all dropped more than 20% over the past 12 months, and it's unclear when the bleeding will stop.

However, one major Chinese stock only lost 2% of its value since the beginning of the year, and it actually rallied 10% over the past three months as its regional peers tumbled. That stock was China Mobile(NYSE: CHL), the country's largest wireless carrier. Let's examine the three main reasons China Mobile remained resilient during the downturn.

Network connections across the Hong Kong skyline.

Image source: Getty Images.

A defensive play with no exposure to the U.S. market

Telcos usually hold up well during market downturns because they're considered defensive plays with stable growth, wide moats, and big dividends. China Mobile, along with its peers China Unicom(NYSE: CHU) and China Telecom(NYSE: CHA), are also state-backed enterprises.

China Mobile was once interested in expanding into the U.S. market, but the Trump Administration blocked that move earlier this year. That setback was actually a blessing, since it eliminated the possibility of the telco getting caught in the crossfire of the escalating trade war.

One of China Mobile's main 4G, 5G, and data center interconnect (DCI) partners is Finnish telecom equipment maker Nokia. This partnership sidesteps any drama that might arise from the use of American components in Chinese networks, or vice versa.

A rock-solid core business

This means investors should simply focus on the growth of China Mobile's user base. The company finished August with nearly 913 million wireless subscribers, representing 0.3% growth from the previous month and 4.5% growth from a year earlier.

4G customers accounted for 75.6% of its total wireless subscribers, compared to 70.6% a year earlier. Customers upgrading from 2G/3G plans boosts China Mobile's revenue per customer, which can offset slowdowns in its wireless growth. That upgrade cycle will continue as China Mobile rolls out its 5G network.

China Mobile also has a growing wireline business. It served 141.9 million wireline broadband customers in August, which represented 2.7% month-over-month growth and 43.4% year-over-year growth. The expansion of China Mobile's wireline user base gives it more bundling opportunities with pay TV and wireless services -- which should lock in more customers over the long term.

A disconnected network cable with a Chinese flag in the background.

Image source: Getty Images.

A low valuation and a solid dividend

Analysts expect China Mobile's revenue to fall 6% this year as its earnings dip 7%. Those declines can be attributed to a government-mandated reduction on wireless fees, which is aimed at boosting mobile internet penetration rates across the country.

China Mobile, China Unicom, and China Telecom all eliminated their domestic roaming charges, and agreed to reduce their mobile data fees by up to 30% this year. They also launched new plans to expand free internet access in public areas and slash their wireline prices. Those moves, along with its network upgrades, will throttle China Mobile's near-term growth.

However, looking further ahead, analysts expect China Mobile's revenue and earnings to both rise 2% next year as it moves past those headwinds. Based on those estimates, China Mobile trades at just 12 times forward earnings.

China Mobile also pays semi-annual dividends, which are re-adjusted every year based on a payout ratio of 40% to 50%, as well as occasional special dividends. Its yield has fluctuated over the past few years, but it's generally stayed between 3% to 5%.

Should you buy China Mobile?

I personally own shares of China Mobile since I think it's one of the safest plays on China's booming mobile market. The company could face tougher competition if the Chinese government goes through with its plan to merge China Unicom and China Telecom to turn the market into a duopoly, but it should remain the 800-pound gorilla of China's telco market for the foreseeable future.